Stewardship and portfolio resilience

Companies depend on the sustainability of the society in which they operate, of the legal system that sanctions their functioning, of the infrastructure that facilitates their growth, and of the education frameworks and healthcare provisions that condition their continued existence. Most important, companies depend on the continued stability of our planet’s ecosystems and the environment in which they’re enveloped.

Companies that fail to recognize this mutual dependency risk losing their social license to operate; what’s more, corporate failure to act sustainably undermines the stability of the systems that stand as background to their operation. Our role as a steward of a global set and disparate range of financial assets is to help ensure that such failures don’t occur—indeed, that the resiliency of both our portfolios and our systemic surroundings should be strengthened.

To us, strong stewardship is inseparable from good investing

Strong stewardship practices are vitally connected to enhancing the resiliency of our clients’ assets, our client relationships, and the health of the markets in which we conduct our asset management responsibilities. Stewardship can make the difference between sustainable governance and persistent shareholder inequities, between the smooth functioning of supply chains and the proliferation of unintended supply chain risks, and between the climate resiliency of company operations and stranded assets that could irreparably damage enterprise value. Without strong stewardship, an investment’s integrity can be compromised; in turn, the asset manager/asset owner relationship can suffer, and the smooth functioning of financial markets can break down.

The good news is that as stewardship codes have developed, they’ve enshrined best practices for companies and asset managers—and these codes continue to evolve on an improving trajectory that enhances the sustainability of the global capital markets.

At this stage in the global development of stewardship codes, expectations for stewardship are generally similar across markets, but there are some nuances that investors must consider when executing against specific codes. Virtually all codes—which today span 20+ markets—include principles directing asset stewards to responsibly exercise their rights and responsibilities; collaborate with peers; engage with their investee companies; integrate environmental, social, and governance factors into investment decision-making; and build robust mechanisms to mitigate conflicts of interest. We consider these broad expectations, but we also execute stewardship responsibilities taking into consideration some of the less common, and sometimes market-specific, nuances of various codes.

"Without strong stewardship, an investment’s integrity can be compromised; in turn, the asset manager/asset owner relationship can suffer, and the smooth functioning of financial markets can break down."

Over time, different stewardship codes have influenced and built on one another as best practices have evolved. For example, the Financial Reporting Council, in its initial consultation for revisions to the UK Stewardship Code, and then in its final draft, demonstrated a focus on disclosure of the rationale for certain proxy voting decisions. In its most recent update, the Council of Experts for Japan’s Stewardship Code drew on this new emphasis and included within its updated principles and expectations that institutional investors explain reasons for certain voting decisions.

The UK Stewardship Code was the first and is one of the most comprehensive global stewardship codes

Source: Stewardship codes by location, Manulife Investment Management, as of March 2021. Manulife Investment Management is a signatory, or prospective signatory, to these codes with the exception of the Canadian and International Corporate Governance Network codes.

We consider many codes through our active ownership work and reporting, but we’ve generally decided to frame the present stewardship review through the lens of the UK Stewardship Code. In our view, the code substantially reflects the best parts of a variety of codes and currently contains the most comprehensive reporting and activity requirements to be found anywhere in the world.

Consider the stewardship principle of purpose, strategy, and culture as an example—dwelling, for the moment, on the significance of culture. In our close reading of stewardship codes, we see a range of approaches to discussing the connection between corporate culture and sustainability. Some codes explicitly call out the importance of a sustainability-focused culture and provide guidance on how they might expect to see sustainability manifest and be pursued. Other codes fail to mention corporate culture at all, or reference its significance only obliquely.

Similarly, several codes encourage asset managers to adopt processes to escalate matters when initial engagement is ineffective in influencing a management team to adopt best practices in reporting or risk oversight. While some codes don’t emphasize escalation through dedicated principles, they at least imply that escalation is a pillar of good stewardship through suggestions that investors should enter collaborative engagements, or vote against management teams, when other methods of engagement haven’t resulted in satisfactory outcomes.

As a global company, we carry out our stewardship activities in alignment with various codes, always striving to meet the broad, shared principles of good stewardship while considering market-specific challenges, characteristics, and expectations.

The institutional investment arm of Manulife Investment Management is an international business with offices in 18 geographies¹. Given this global footprint, and given the global distribution of our assets, we conduct operations or are exposed to other companies’ operations in virtually every region and most countries in the world. By extension, we view good stewardship as a universal obligation and, indeed, similar principles flow across various codes. Moreover, while the application of stewardship practices may differ, depending on the geographies, size, asset class, and associated rights of our investments, our objective is always the same: to preserve and enhance client value by continuously improving our management of sustainability issues.

Conceptions of board independence vary

We encourage strong and independent leadership on corporate boards because we believe that can help balance strong insider influence with an objective representation of shareholder interests. But the form an independent voice takes can vary across markets: Boards in North America are expected to have a majority of directors that can be classified as independent, and yet, in many Asian markets, boards need only achieve one-third independence under local codes and expectations.

Standards and practices also change over time. A decade ago in Brazil, for example, most firms had boards that were about one-third independent, whereas today many firms achieve greater than 40% independence.² Considering gender diversity trends as another factor, Japanese boards have historically had poor gender representation—but this is changing. Tellingly, the number of all-male boards on the MSCI ACWI Index dropped from 45% in 2018 to 33% in 2019.³ Investors may consider revisiting board diversity standards over the next few years given this rapid change.

We consider these differences as we engage with management teams, join collaborative initiatives, exercise voting rights, negotiate terms, and participate in other activities. And our expectations for board independence—to continue with our first example—must change with the market and evolve with prevailing standards and best practices. We consistently push management teams and firms to move toward best practices in a given market, but that can mean, for example, holding issuers to a 40% independence standard in Brazil and a majority independence standard in the United States—at least until standards on either side of this comparison change.

Cross-shareholdings in Japan

In Japan, we engage with issuers on cross-shareholding, a local historical practice through which firms have owned shares of business partners and clients in order to bolster those relationships. In our contemporary understanding, however, cross-shareholding may not only be an inefficient use of capital, but it may also reduce the ability of general shareholders to oversee management through proxy voting. Outsize portions of voting shares can be held by management-friendly investors, effectively diminishing the power of noninsiders.

That observation notwithstanding, cross-shareholding can serve a strategic benefit, as when the practice is used to support research and development collaborations or shared production facilities. As we monitor Japanese firms, we attempt to differentiate between genuine strategic cross-shareholdings and those that are purely protective and then engage through dialogue or proxy voting to remove those shareholdings that aren’t in the interests of all shareholders.

Shareholder proposals are a local phenomenon

As standards can change across markets, so can active ownership rights and responsibilities. Local laws, regulations, and practices shape the rights and influence we have at our disposal to engage in those markets. In the United States, for example, regulations governing shareholders’ ability to put resolutions on a ballot result in hundreds of shareholder proposals every year covering topics ranging from political and lobbying expenditures and executive compensation to greenhouse gas emissions and board diversity.

We view this as being helpful. Shareholders of U.S. firms have become used to opining on a wide variety of issues through proxy voting, a practice that reinforces a reality of shareholder rights. In other jurisdictions, however, such resolutions are uncommon, and shareholders must use other means, such as through issuer dialogue or policymaker engagement, to influence management teams.

Real estate and regulatory change

One of the more complex fields for asset stewardship can be found in real estate markets, where regulatory requirements and efforts to encourage sustainable business practices have historically progressed at different speeds and along varying political pathways in each jurisdiction. As an owner and operator of real estate assets in 11 countries and 28 cities,⁴ we’re well acquainted with a host of existing local frameworks—and rapidly developing regulatory changes—that are all focused on the urgencies of sustainability at the municipal, city, and state or province levels. The work of real estate stewardship, in part, entails calibrating our strategy for sustainable real estate ownership and operation with these local needs, requirements, and trends.

This can be a challenging task in the absence of comprehensive coordination among regulators, local officials, and asset managers. While different municipalities approach the subject of sustainability with similar intent—for example, to incorporate principles of climate mitigation and adaptation into real estate ownership and operation—there’s a high degree of variation in disclosure requirements and even thresholds for defining sustainable operations. For that reason, we support efforts to establish uniform codes, protocols, and disclosures across local boundaries, and we work together with local officials to harmonize reporting requirements.

As investors, we deliver returns for our clients in several ways: We invest in or directly manage assets that generate returns and we work with investment partners and stakeholders to enhance the sustainability of our assets over time. Our stewardship practices are designed to help us deliver on these objectives, and we apply them across the capital markets.

Beyond the fundamental integration of ESG considerations into our investment processes, investment stewardship takes different forms depending on the asset class. In private asset classes in which we operate assets directly, stewardship principles inform our management approach, whereas in other asset classes, we use engagement (i.e., meetings and written communication) with issuers and influencers to assess and monitor our investments.

We may also identify sustainability risks or opportunities that we believe are material to our investment theses and encourage issuers to refine their practices around a given issue. We plan engagements related to fixed-income holdings around those points where we believe we’re likely to have the strongest influence on the issuer—pre-investment, or during a restructuring, for example. If we believe we’ll obtain a better result working with other investors in a particular situation, we’ll consider joining a collaborative engagement focused on influencing the firm in question.

We exercise active ownership across all of our assets and investments. The specific modes in which we exert influence may vary—especially as, in some cases, we’re owners and operators of the assets in question, while in others we have ownership rights conferred to us through investment. We adapt our approach to these formal differences while remaining focused on preserving and enhancing asset value through our activities.

To us, being an active steward is a critical part of what it means to be an active manager. Ensuring portfolio resiliency requires us to do more than traditional fundamental analysis. It requires keeping up with changes to stewardship codes and the increased adoption of stewardship principles—and evolving our approach. This active side of stewardship is central to our ability to protect and grow the value of the assets we own or manage on behalf of our clients. Whether in broad thematic engagements, standards-setting discussions, or one-on-one company engagements, we strive to identify areas that may help us fortify management, reporting, and sustainability practices and then work with stakeholders to strengthen these frameworks supporting our assets and investments.

1 Manulife Investment Management, as of March 31, 2021. 2 “Proxy Voting Guidelines,” Institutional Shareholder Services, November 2020. 3 “Women on Boards: 2019 Progress Report,” MSCI, December 2019. 4 Manulife Investment Management, as of March 31, 2021.